Business Monday

Home priced too high? That’s a seller’s recipe for failure

AP

“Price it high… we can always come down!” Real estate agents like me hear this often from home sellers, and while this strategy may sound good in theory, it’s actually a recipe for failure. While the seller sets the price, the market determines the value, and smart sellers pay attention to the market and the advice of their agents.

Overpriced homes create problems not only for individual sellers, but for an entire market. A large inventory of properties in any given building, neighborhood or county causes the illusion of a weakening market, which exacerbates buyers waiting for the market to weaken further.

With the Miami residential market currently in one of its famous fluctuations, sellers need to price their homes accordingly to reach more prospective buyers, sell their home faster, and actually sell at the best price.

A buyer’s vs. seller’s market

In a seller’s market, there is a low supply of properties for sale and strong demand from buyers, and prices will typically increase until the peak is reached. Pricing on the high side in that type of market actually makes sense, and most savvy agents will recommend it.

In a softening market, however, accurate pricing is critical. Even a slightly overpriced property can be disastrous. While it stays on the market without selling, more listings come on the market, adding to the inventory. With more listings and fewer sales (more supply, less demand), it’s inevitable that prices start to slip.

Knowing your market’s absorption rate is vital to correctly pricing the property. This is the rate at which listed properties are sold, or “absorbed” by the market. (This data is often referred to as “months of inventory.”) For example, if there is a six months’ supply, it would take six months for all the existing listings to sell, if no other properties came on the market. It is generally considered that zero to five months’ supply is a seller’s market; six to 10 months’ supply is a balanced market; and 11 or more months’ supply is a buyer’s market.

When analyzing the absorption rate, your agent should make sure the factors are “homogenous” to your home; i.e., the same property type (single family home/condominium/townhome), location/area, and of course, price range. This provides you with the most accurate view of a particular home’s market, and illustrates the true impact of correct pricing.

Accurate pricing in action

To demonstrate this, I recently did a study of condominium and single-family homes in the coastal communities of Sunny Isles Beach, Aventura, Bal Harbour, Bay Harbor Islands, Surfside, Miami Beach, North Bay Village, Fisher Island and Key Biscayne. As you can see from the chart, condos priced under $300,000 have the fastest absorption rate, clearly showing high demand on the lower end of the pricing spectrum (but still at the higher end of what could be considered a balanced market).

 

On the other hand, the higher-priced segments all fall into obvious buyer’s markets, with an extremely slow absorption rate of 37 months(!) for the $1 million-plus market. Here we see the advantages of pricing properties for less than the comparable sales, to attract buyers waiting on the sidelines for this very thing.

Single-family homes in this study show a lack of inventory, with healthy absorption rates in the $750,000 and less segments, especially under $500,000. In these segments, sellers still must know their comparable closed sales and active listings but can price their house on par with them — or if the home has compelling features, possibly higher.

Notice how the absorption rate jumps from 6.4 months in the $500,000 to $750,000 segment to more than 19 months in the $750,000 to $1 million segment? A major escalation from a balanced market to a strong buyer’s market (and even stronger in the $1 million-plus segment). For most sellers in these segments, long absorption windows may not be the end of the world — but if a sale is necessary, then the price must be correctly set to capture the interest of a smaller pool of buyers.

I have been selling homes since 1985 and have dealt with many sellers who insisted on overpricing their homes. In nearly every single case, these homes sell for lower prices, take much longer to sell, and cause infinitely more stress than the ones that have been priced correctly through detailed analysis.

If you are thinking about selling your home, have your agent create a detailed price analysis tailor-made for your property, specific to your pricing segment, neighborhood or development. Be open and objective to what the report reveals, do yourself a tremendous favor, and price your home accurately — the first time.

Ralph E. De Martino is the president and founder of Ocean International Realty, a past president of the MIAMI Association of REALTORS, and an advisory board member of the Master Brokers Forum. He can be reached at ralph@OIRmiami.com or 305-695-1105.

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